Certificates
of Deposit have long been a place for people to park their funds for
set period of times. In fact, in the recent downturn since 2000, CDs
have been growing in popularity because, in most cases, deposits are
backed by the FDIC and the reserves of the financial institution that
issues them.

But in recent
months, CD rates have plummeted. According to BankRate.com, average
CD rates dropped to just 1.72% for a 12 month
CD (April 21, 2003). Several analysts have publicly wondered if CD
rates can go much lower, given market conditions and the current state
of
mortgage rates, which often indirectly impact CD offering rates. And
if interest
rates climb, an individual could miss out if they are locked into a
longer term CD to maximize returns.

How can you
take advantage of CD yields, while still participating in an interest
rate upswing? That’s
where the CD Ladder Strategy can come into play.

With a CD
Ladder Strategy, you don’t just purchase a single CD
for a set amount of time. Instead, you “ladder” your
money over different maturities. By purchasing shorter- and longer-term
CDs,
you spread out any interest rate risk. You don’t earn as
much as you would by locking in for the long-term, but you are
able to
take advantage
of the market should interest rates rise in the interim.

Suppose
you have $100,000 to deposit, and are looking at a 5 year time
horizon. By employing the CD Ladder Strategy, instead of locking
your
money in for 5 years, you would spread that around shorter maturities.
So you might buy:

A $20,000
1-Year CD;

A $20,000
2-Year CD;

A $20,000
3-Year CD;

A $20,000
4-Year CD; and

A $20,000
5 Year CD.

The idea is
to "ladder" your money among different maturities, to
take advantage of changing
interest rates in the future.

As each CD
comes up for renewal, you purchase a new 5 Year CD, locking in the
best interest rate at
the time. You’re always assured the
best rate of return, while having access to funds every year
when the next CD matures.

Imagine that
twelve months have passed, and your first $20,000 CD is up for renewal.
If interest rates have gone up, you can
roll that
money
into a brand new 5 year CD, locking in a better rate. If
interest rates have slipped, that’s alright, since 80% of your
money was locked in when rates were higher. Stick with the strategy,
and lock in a new
5 Year CD. Overall, you’ll get a better rate of return,
and you’ll
have another CD coming due every
12 months. As people in this volatile environment have realized,
ANYTHING can happen
in
12 months.

Make sure
your bases are covered, and your interest rate risk is minimal by employing
the CD Ladder Strategy.
You’ll
achieve better rates of return, and be able to weather
any interest rate changes.